Types of Plans

SEP IRA (Simplified Employee Pension Plan), appropriate for small employers seeking a low-cost, low-maintenance arrangement. Employer makes contribution to employees IRAs. Employer determines annual deductible contribution to all plan participants up to amount prescribed by IRS. Employees may also contribute up to the usual IRA limits. All accounts are 100% vested immediately.

Advantages:

• Easy to establish and maintain
• Low cost
• Employer not required to make contributions every year
• Contributions are deductible
• Tax deferred earnings

Simple IRA (Savings Incentive Match Plan for Employees), appropriate for employers with 100 or fewer employees seeking a low cost, easily administered salary reduction arrangement. Employees may contribute to a Simple IRA account through salary deferrals. Employer contributes to the employees Simple IRA account according to one of two IRS-prescribed formulas: (1) matches each employee's salary deferrals, up to 3% of participating employee's compensation or (2) contributes 2% of each employees compensation. All contributions are 100% vested immediately.

Advantages:

• Easy to establish and maintain
• Relatively low cost
• Provides incentive for employees to contribute
• Salary deferrals reduce employees current taxable income
• Contributions are deductible
• Tax deferred earnings

Profit Sharing Plans, Appropriate for any size business or organization that wants to offer a retirement plan to employees with the flexibility to change contribution amounts each year. Plan design is determined by the employer, within guidelines, and subject to certain nondiscrimination tests. Employer contributes a percentage of payroll to plan each year at the employer's discretion. Contributions are allocated to the accounts of all eligible employees according to a predetermined formula. The formula may be an equal percentage of each employee's pay or may be skewed toward older and/or more highly paid employees. Eligibility may be restricted to exclude part-time and certain classes of employees. Graduated vesting schedules may be applied. The plan generally must file annually an IRS Form 5500. Investments may be managed by the employer or a designated professional, or may be participant directed.

Advantages:

• Employer is not required to make contributions every year
• Contributions are deductible
• Flexibility in plan design
• May have vesting schedule (encourages employee retention)
• Loans may be allowed
• Tax deferred earnings

401(k) Plan (Profit Sharing Plans with a salary deferral (401(k)) feature added), appropriate for any size business or 501[c] organization that wants to offer a salary reduction savings plan to employees. These plans can also have employer profit sharing contributions with the flexibility to change contribution amounts each year. Employees make salary deferral contributions to the plan pursuant to an agreement with the employer to automatically deduct a percentage of the employee's pay. Each year a maximum dollar amount is determined by the IRS.

The employer may match some or all employee contributions and, in addition, profit sharing contributions may be made. Maximum combined contributions (employee and employer) to each employee may not exceed amount prescribed by IRS. Total contributions to the plan may not exceed amount prescribed by IRS.

The employer, within guidelines and subject to certain nondiscrimination tests, determines plan design. Eligibility may be restricted to exclude part-time and certain classes of employees. Graduated vesting schedules may be applied to the employer contributions but all salary deferral contributions are 100% vested immediately. The plan must file annually an IRS Form 5500. Investments are usually participant directed.

Advantages:

• Employees share responsibility for retirement funding
• Reduces current taxable income to employees
• Highly visible and valued employee benefit
• Employer is not required to make contributions every year
• All contributions are deductible to the employer
• Flexibility in plan design
• May have vesting schedule on employer contributions (encourages employee retention)
• Loans may be allowed
• Tax deferred earnings

403(b) Plan (sometimes called TSA program), appropriate for nonprofit 501[c][3] organizations and public educational institutions that want to establish an employee salary deferral program. The employer may also contribute to the plan, similar to a 401(k) plan. Employees make pre-tax salary deferral contributions to the plan pursuant to an agreement with the employer to automatically deduct a percentage of the employee's pay. Each year a maximum dollar amount is determined by the IRS. Only mutual funds or annuity contracts may be used as investment vehicles.

Some or all employee contributions may be matched by the employer and, in addition, an "employer basic" contribution to all eligible employees may be made. Maximum combined contributions (employee and employer) to each employee may not exceed amount prescribed by IRS.

The plan design is determined by the employer. If employer contributions are made, the plan is governed by ERISA. Graduated vesting schedules may be applied to the employer contributions but all salary deferral contributions are 100% vested. If only salary deferrals are permitted the plan is not under ERISA and requires very little administrative work.

Advantages:

• Employees share responsibility for retirement funding
• Reduces current taxable income to employees
• Salary deferrals may not be subject to some nondiscrimination tests that apply to 401(k) plans, therefore, this plan may be better than a 401(k) for employers with many highly compensated employees.
• Highly visible and valued employee benefit
• Employer is not required to make basic contributions
• Flexibility in plan design
• May have vesting schedule on employer contributions (encourages employee retention)
• Loans may be allowed
• Tax deferred earnings

Money Purchase Pension, Appropriate for any size business or organization that wants to offer a retirement plan to employees and can commit to making the same contribution percentage each year. The employer, within guidelines and subject to nondiscrimination tests, determines plan design. Employer must make the same percentage contribution each year. Contributions may be as great as 25% of payroll. Eligibility may be restricted to exclude part-time and certain classes of employees. Graduated vesting schedules may be applied. The plan generally must file annually an IRS Form 5500. Investments may be managed by the employer or a designated professional, or may be participant directed.

Advantages:

• Contributions are deductible
• Flexibility in plan design
• May have vesting schedule (encourages employee retention)
• Loans may be allowed
• Tax deferred earnings

Defined Benefit, appropriate for any size employer willing to guarantee a benefit to employees at retirement and willing to accept the inherent financial responsibility and investment risk of that guarantee. These plans define a benefit to be received by employees upon retirement rather than defining the contributions to be made to employee's accounts each year. The employer, to determine the retirement benefit of each employee, adopts a formula. The formula is usually based on years of service and pay. The employer must contribute an amount each year that is actuarially calculated to achieve the promised benefit. The benefit may be guaranteed by the PBGC requiring the payment of insurance premiums.

Advantages:

• Contributions are deductible
• The employer may be able to make much larger contributions than with other tax-qualified plans
• Provides predictable retirement benefit for employees

Non-qualified Plans (Deferred Compensation Arrangements), appropriate for stable businesses or organizations that need to provide retirement benefits for certain key employees beyond those available from tax-qualified plans. Certain key employees can be made eligible to defer income. The deferred income remains an asset of the employer and is therefore subject to claims of the employer's creditors. The employer may choose to set aside funds to pay the employee at a later date. One way to set aside funds is by using a Rabbi Trust. It can not be rolled over into any other tax-qualified plan or IRA. There is no limit on the amount of income that can be deferred into these arrangements.

Advantages:

• Allows key employees to supplement other tax-qualified plans, such as 401(k), with additional deferrals
• Allows employers to provide greater retirement benefit to key employees
• No limits
• No nondiscrimination testing